Think you understand compounding? What about negative compounding?
“Shark Tank” star Kevin O’Leary has some simple advice for anyone who finds investing scary: Just do it. Now.
If you save, say, $5,000 in one year, a typical stock market return in a diversified, low-cost index fund means that a year later you will have $5,365.In 10 years at a typical stock market return your money will more than double, hitting $10,115. That’s because every year your gains are reinvested and growing as well.
Five thousand dollars multiplied by 40 years is $200,000. The extra $1 million is all from compounding interest.Why low cost? Because even less understood than compounding is the concept of negative compounding. Thus the effect of a 1% fee in a stock mutual fund is that you lose one-third and up to one-half of your potential gains to the fund’s managers. You’ve effectively sandbagged your own retirement.
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